Recent empirical work identies two main channels through which consumers benefit
from trade. Trade liberalization lowers prices, while it raises product variety. This paper
develops the first model that connects both channels and interprets their interaction.
It shows that heterogeneity in firm productivity is the source behind both. Upon
liberalization efficient exporters enter, pushing out the least efficient domestic firms.
Two countervailing forces emerge, both stylized facts. Liberalization leaves a more
concentrated market. But exporters offer more variety than the firms that they replace.
Remarkably, total variety unambiguously increases. Exploration of comparative statics
leads to an intuitive explanation
